There is an alternative for the Greek economy
As some economists have already observed, the Greek economic crisis is to a large extent due to the high cost of living in Greece, meaning high prices and salaries. After the country?s accession to the eurozone, the domestic lending bubble and the overheating of the economy led to an unreasonable rise in prices and salaries. The loss of competitiveness (or the high cost) of Greek products means that they were pushed out by similar foreign products both in the Greek market and abroad. So, when foreign lending ceased in 2008, Greece was faced with a gaping recession stemming from an unprecedented drop in national revenue coupled with a steep rise in unemployment. And as much as the public debt exacerbated this situation, the debt crisis is more the result rather than the cause of the recession.
Unfortunately, in 2009, the Greek government misread the situation. It saw it as a simple debt crisis and failed to pay the warranted attention to the deeper problems. So, from the initial Memorandum and up until the deal signed on July 21, 2011, along with its creditors, the government pursued a string of misguided policies (together with a few that were very correct), exacerbating the situation and extinguishing any hope of a quick recovery.
However, even though a lot of precious time has been lost, economic policy can still be changed to focus on the following two areas:
The first is to significantly reduce the cost of living (prices and salaries) in Greece compared to the rest of the eurozone. But the necessary drop in the standard of living of the average Greek needs to be channeled toward increasing the economy?s competitiveness rather than servicing the public sector?s creditors. For example, the government could draw up a social contract whereby workers take a cut in pay in exchange for a reduction in taxes. At the same time, citizens and businesses can be unburdened of a small portion of their debts toward banks.
As a result, Greek products will become cheaper and more competitive in the domestic and foreign markets, and this can help the economy turn around and reduce unemployment.
Secondly, Greece needs to radically restructure its debt and make it viable with, for example, a haircut of around 50-60 percent. This is necessary not just in order to reduce taxes and the cost of living, but also to attract foreign investors who are currently skeptical about making a move in Greece because they feel that the government could introduce new taxes at any given moment.
Given the support for a haircut in Europe, and especially Germany, it is very likely that the Greek government will be able to hammer out a favorable deal if it decides to go the way of a debt restructuring.
The only way for this scenario to become less painful is a generous package of assistance and subsidies from the European Union, something that seems unlikely even though the cost for the EU would be minimal.
Therefore, unless Greece tackles the issues of the high cost of living and the nonviable debt, it will very likely condemn itself to a full economic decline in the medium term. And if it does reach this point because of mismanagement of the crisis, an exit from the eurozone might no longer look like the worst-case scenario.
